Real Estate in the COVID Era
If you’ve watched the housing market throughout the pandemic, you’ve probably noticed it’s been all over the place. In 2020, people didn’t want to leave their homes as Covid-19 began its spread, which left a dearth of houses on the market. Realtors saw shockingly few properties for sale, driving up the price of those few available. As the pandemic wore on, people’s fear abated as they got used to the “new normal,” and prices continued to inflate: folks started selling their homes. Now, there’s less of a shortage of available properties, but many buyers are struggling against fierce competition fueled by months of pent-up demand and still high prices.
Student Loans, DTI, and Mortgages
For those with student loans, home-buying concerns could be compounded by the mortgage application process: how will my monthly payments affect my debt-to-income ratio? This number is essential to banks when considering a potential borrower’s financial fitness, and includes all of the borrower’s fiscal obligations. A lender will typically calculate the borrower’s monthly student loan payment as between 0.5% to 1.0% of their total loan balance. That means if you had $300,000 in loans, your assumed monthly payment would be $1,500 to $3,000 a month, which—depending on your income—could greatly harm your DTI ratio. This calculation has been particularly problematic during the federal student loan payment freeze due to the pandemic, as lenders are required to use this figure while your student loans are in forbearance.
Income-Driven Repayment Plans and Home Loans
If you have an IDR plan, your monthly student loan payment isn’t based on your total loan amount, but on your income and family size. When you have a large amount of federal student loans, it’s your “silver bullet” when buying a house. Unfortunately, in order to reduce your DTI for a home loan application, you need to get your student loans out of forbearance and back into regular repayment. Your servicer—generally straight from your account on their website—can generate a letter for the bank that states your monthly payment, which they should use for their DTI calculations. Your IDR payment amount, as stated on this letter, replaces the 0.5-1.0% figure they would otherwise use. Oddly enough, it seems like many lenders are surprisingly uninformed regarding student loans, so you may need to explain this process to them.
Dr. Sam is a medical resident at one of the large university hospitals in the Midwest. After medical school in one of the big East coast cities, she wanted to be closer to home where the pace of life was a little slower and a lot cheaper. After placing in her top program, she decided she wanted to put down roots and buy a modest house. With about $300k in student loans and a resident’s salary, she was worried the bank wouldn’t approve her for a home loan. When they first calculated her DTI, they knew she wouldn’t qualify, so they asked her if she had someone who could cosign; it turned out her student loans were getting in the way. She and her boyfriend were talking about getting married, but she wasn’t quite ready to for that big a purchase with him. Fortunately, it was an easy fix: she was able to take her loans out of COVID forbearance and get on an IDR plan with a monthly payment of under $150 per month, which dramatically changed her DTI ratio. Dr. Sam was able to buy her perfect little house next to campus with money to spare, and is ready to build for her life beyond residency.
Student loans shouldn’t keep you from owning your home. With the right knowledge and a little tenacity, you’ll be saying “there’s no place like home” in no time.
P.S. Good news for Navigate clients: many lenders accept the monthly student loan payment estimates we run with you for DTI purposes. That way, we can help you avoid taking your loans out of COVID forbearance!